Obtaining a Loan in Chapter 13 Bankruptcy

March 2, 2011

By: David M. Serafin

Chapter 13 allows for a reorganization of debts in the form of a three to five year monthly repayment plan (with anywhere from $0 to 100% being paid back to unsecured creditors). Nonetheless, the Colorado Bankruptcy Court needs to grant written permission for you to obtain certain types of loans before a discharge is entered. The Court’s primary concern is protecting the Bankruptcy Estate or creditors who would be otherwise prejudiced by a loan which decreases a debtor’s disposable income (and distribution to unsecured creditors). Also, the standing chapter 13 trustee in Colorado, requires you to complete an Application to Incur New Debt after which it will (if appropriate) acquiesce to the transaction.

The court and trustee understand that three to five years is a long time to wait to replace an old car or to make a major home repair. In other words, life circumstances often change such that it is appropriate to file a Motion to Modify (with notice and an opportunity to respond for all creditors) an already confirmed chapter 13 plan. Regardless of the situation, please notify our office of any necessity to incur new debt before signing anything.

Among the more commons requests to incur new debt are requests for the bankruptcy court to approve a loan modification (even if the debtors are current on the mortgage payment and no arrears is being cured in the plan) and to borrow from a 401(k) plan.